Changing the Productivity Narrative

March 16, 2024

HERE'S MY TAKE

Successful politics means framing the story “your way.” Federal Conservative polling success correlates with seven in 10 Canadians agreeing with the “Canada is broken” story, as measured by a recent Leger poll. Affordability and economic issues concern Canadians most (see the Meaningful Metrics below). While “ordinary Canadians” would be hard-pressed to explain how things like GDP, money supply, and productivity matter, they know when things are working well and when they are not.

By most measures, things are not working well.

Take the size of our economy, for example. Statistics Canada says per-capita gross domestic product (GDP) dropped in the last quarter of 2023 for the fifth time out of the last six quarters. Translation: Canada’s economic output is shrinking. So, commentators like Andrew Coyne observe that “Canada is no longer one of richest nations on earth; country after country is passing us by.” Sean Speer and Tyler Jackson write about "Canada’s lost economic decade.”

Wonks who follow economists on X (formerly Twitter) have been treated to competing graphs to show things are either “really bad” or “not as bad as others are making them out to be, because you’re focused on the wrong numbers.” The official Liberal Party advertisements proclaim that “the economy is not numbers; the economy is people” as they try to change this narrative.

You can’t avoid numbers when talking economics, although political narratives involve the consequences of the numbers rather than the numbers themselves. I recall quoting Presient Reagan in a high-school economics presentation. “You can officially define the terms or default to the president’s: 'A recession is when your neighbour loses his job; a depression is when you lose yours.’” 

GDP numbers are often misunderstood. So, governments have justified deficit spending by using debt-to-GDP ratio arguments. “Think of government debt like an investment that creates capacity for growth—so we can grow our way to prosperity through government spending (as long as we are careful about inflation)” or at least, so goes the argument. Critics suggest this is naïve and neglects the economic consequences when a government just prints more money to pay the bills that taxes can’t cover.

The debate has shifted now from government spending to productivity. Our standard of living is falling compared to other countries. The dream of home ownership has become unrealistic and unattainable for many young Canadians. The average wage is barely enough for the basic necessities of life. A stagnant GDP-per-capita for the last decade tells us something about our living standards. 

It is also important to remind ourselves about the limits of GDP metrics and what they do not capture. GDP counts productivity by the amount of money that changes hands. Paying someone to provide childcare for your kids or nursing care for your aging parents is part of GDP; doing it as part of your family responsibilities is not.

There is at least $25 billion of “informal health care provided by families, and one can think of dozens of other examples of meaningful contributions to our living standards not captured by GDP. A recreation worker or coach paid by the city is part of GDP; the volunteers that make our minor sports leagues work are not. We won’t muddy the water further by mentioning the various “in-kind” bartering and “black market” niches in the economy that aren’t captured by the GDP story. (Italy changed its calculation methods in 2015 so as to capture prostitution and narcotics in its GDP measures). It’s safe to say Canadian GDP doesn’t capture a whole lot of the good or the bad that happens in our economy.

But GDP is what we’ve got, so let’s run with it. 

The OECD projects Canada as having among the lowest rate of GDP-per-capita growth by 2060 among 40 OECD countries. Elementary mathematics tells us that when over one million residents were added to Canada’s population last year (97% of which came through immigration), the other side of the equation needs comparable growth just to keep the numbers stable. That’s easier when the labour additions come to fill highly-skilled occupations. However, the evidence suggests that we are not keeping up with the housing and transition needs of our residents. Much less are we integrating them into the skilled jobs that are required to provide the resources to sustain our standard of living. The math backs the everyday experience of many—it is much harder to make ends meet even for those who have stable employment.

There is more to the input side of productivity than labour. An economy requires capital, including significant business investment. Starting or growing a business involves risk. And the mysterious set of calculations that prompt investors to decide when that risk is worth taking is difficult to put a finger on. We can debate the cause(s); we can’t deny an almost 20% decline in business investment in Canada since the mid-2000s. 

Small and medium-sized firms have most significantly lost confidence in Canada in the past few decades. While the pandemic hangover explains some of the decline in new business start-ups, it’s still notable that only 7% of firms were new in 2021, which was down from 12% in 2006. There are many variables involved (including tax levels, bureaucratic and banking regulations, transfer of businesses between generations) all combining to make entrepreneurs conclude starts-ups aren’t worth the trouble. Speer and Jackson note that Canada is the second lowest spender on business research and development among G7 countries. 

The temptation is to look for a government fix. I’m not a libertarian; I see a role for government. I’m not against appropriate government interventions. Nor do I entirely take at face value Mr. Poilievre’s assertion to the Vancouver Board of Trade last week that business lobbyists are “utterly useless.” My guess is that after a few years of a Poilievre government, there will still be plenty of busy lobbyists. 

Still, the temptation for the government to step in and try to “fix” productivity is part of the problem, not the solution. Employment numbers continue to show public sector employment growth (4.7%) significantly larger than private sector growth (1.2%). Even well-run programs, when they rely on state incentives rather than entrepreneurial risk, contribute to the further erosion of the culture that is required to create the conditions for productivity.

The answer to fixing Canada isn’t just fixing government. We need a competent government doing more effectively what it needs to do. (The procurement policies exposed by the ArriveCan spectacle this week certainly don’t inspire confidence in government generally, but that’s another subject). More than just competent government, we need all of our institutions, including the private sector, to be fueled by a confidence and entrepreneurial energy that believes “we can do this.”

Canada needs a renewed civic and economic confidence that can spread contagiously across sectors. Political narratives of blame may win elections, but it will take a positive vision that is shareable and plausible well beyond politics to change the present trajectory.

WHAT I’M READING

Online Harms Act Orwelled

Last week I opined about the parts of the proposed Online Harms Act that cause concerns. The intensity increased this week with even author Margaret Atwood expressing concern the legislation is “Orwellian.” Lawyer Kathryn Marshall predicted the bill would be unworkable and would produce “justice-system dysfunction." Jen Gerson reports on the technical details, none of which will alleviate the concerns being raised. Originally, Andrew Coyne gave the proposal a “one cheer” while noting his concerns. His column this Friday reconsidered this, noting that after further review, the fine print is “breathtaking in its recklessness” and the bill deserves to be pulled entirely.

Pension Plans Exist to Produce Pensions

Seven former CEOs of pension plans combined for a Globe and Mail op-ed responding to calls for more Canadian pension fund investment in Canada. They note that the average return for the S&P 500 has been 14% over the last decade while the TSX 60 has returns of about 7% in the same period. And the authors warn “unintended harm is much more likely when policy instruments designed for separate and distinct objectives (e.g. the safety and soundness of pension plans vs. general regional economic development or corporate subsidies) are confounded and implemented without accountability to government for outcome—good or bad.”

When Foreign Correspondent becomes a Foreign Term

Harrison Lowman reports that there are only about 60 full-time foreign correspondents working for Canadian media companies today, three-quarters of them employed by the CBC. In part, this is a reflection of Canada’s growing irrelevance as an international power. However, given our dependence on trade, the lack of capacity to know about global events and how they affect Canada uniquely is a significant problem. “Where we are now as a country is very much reflected in how we cover the world. And we don’t. We have withdrawn,” concludes the author of the book While Canada Slept: How We Lost Our Place in the World. “You have a diminished media in a diminished country.”

Sliding to Disrespect

I regularly beat the drum of concern regarding declining civility but the news keeps getting worse so I need to repeat it. This week a Republican fundraising event in Kansas sold tickets for attendees to physically beat a Joe Biden effigy. Donald Trump stooped to a new low by mimicking President Biden's stutter in his speeches as a comic line. (When the mocking of political opponent's physical challenges became an issue in a Canadian election, the party responsible paid a significant political price.) Ottawa mayor Mark Sutcliffe wrote in the Globe and Mail that elected people should not have to tolerate the sort of abuse that has become normal for politicians and is partly to blame for the declining quality of people willing to serve. It is hard to counter these trends but the first step is for all of us to call it out, especially when it comes from candidates we otherwise might support.

Social Capital Punishment

I usually avoid plugging Cardus stuff but April Lawson's Comment essay provides a unique take on cancel culture. She doesn’t just complain about it. She provides some positive advice and specific steps forward to deal with it. Her description of “social capital punishment” is both memorable and apt.

MEANINGFUL METRICS

"Sean Speer and Taylor Jackson: Canada cannot afford another lost economic decade".

TAKE IT TO-GO

When a Lighthouse Gets Submarined

When I was a kid growing up not so far from Port Burwell, Ontario, I associated the place with beaches and sand dunes. My most recent visit was during COVID when our family took a socially-distanced tour of the World War II submarine that now serves as a museum. Buoys will be buoys, and some of the war stories told by the tour guide intrigued both my son and me. But to be candid, I hadn’t given either the sub nor Port Burwell another thought until it was featured in the National Post this week.

It turns out the costs of the submarine are drowning the local budgets, possibly torpedoing continued access to the historic lighthouse nearby. The town can’t afford both to keep the sub afloat and to brighten up the lighthouse. I know this doesn’t sound overly optimistic, but it put wind in my sails to breeze through a few below C-level wordplays. (Even a perfect submarine is sub-optimal, no?) But if I was properly illuminated by the story, it is the lighthouse that is most in jeopardy.

I don’t harbour any ill will towards this historic structure but I’ll confess to remembering the submarine’s and not the lighthouse’s existence. I’ve had plenty of time to reflect. It may be that the fog of COVID recollections caused me to mist it when we drove through. But for the sake of the history buffs from my old stomping grounds, I hope that they find a way to keep the light shining brightly. It would be a shame if such a pretty historical building got deep-sixed.

‘Til next week.